Being in the factoring business, I often speak with business owners about their financing situations. Many haven’t heard of invoice factoring, or aren’t aware of exactly how it works or how it can benefit them. Once the process is explained, I can see the little light turn on in their heads and the concept of factoring becomes clear. Once people understand how a factoring company can help a business grow, the concept becomes much more appealing!
What kinds of businesses should take advantage of invoice factoring? Any company that sells a product or service to another business is a good candidate. For the most part, fast-growing businesses or ones primed to experience growth can benefit very quickly.
Oftentimes a candidate for factoring has won new contracts and needs to prepare with new employees, more supplies or new equipment. By factoring the invoices created from finished work, the company can grow quickly without the threat of running out of cash, since invoice factoring creates a steady and reliable stream of it. Even better, the factoring account grows with the revenue so there’s no need to keep reapplying for more capital.
Here’s another thing to think about:
Isn’t a typical bank loan or line of credit supposed to work like invoice factoring?
In theory, you’d take a bank line because you need money to use while waiting for invoices to get paid. You access the account to pay bills or buy equipment or whatever, then should replace/pay off that debt once income from the sale comes in. As you can imagine, that takes great discipline.
Even that way, you are limited by the line of credit which can limit sales. Factoring is limited only by your sales, not an arbitrary number selected by the bank.
By factoring, you would eliminate the debt part while ensuring invoices generated are paid and the money deposited into your account immediately.
Once a small business owner takes a look at his or her accounts receivable aging report, the idea of taking those dollars off the aging and putting them into the bank account starts to become very attractive.
And that’s when the light turns on!